Friday, 28 April 2017

Implications for charitable
organizations after amendments to Finance Bill 2017

The
Finance Bill 2017 has been approved after modifications by both Houses of
Parliament and received the assent of the President of India on 31st
March 2017.

We
are highlighting what is now law, relevant to charitable organizations in India:

Section 56(2)(x) not to apply to
trust created for the benefit of relatives

Earlier
exemption from the new clause (x) in Sec. 56(2) was provided to specified
trusts and institutions referred to in Section 10(23C) or trusts registered u/s
12AA. However, after amendment, exemption from this section is extended for any
sum of money or any property received from an individual by a trust created or
established solely for the benefit of relative of the individual. Further, it
is also extended to a trust registered u/s 12A.

Reduction in limit of cash
transactions

The
Finance Bill had proposed a new Section 269ST to provide that no person shall
receive a sum of Rs. 3 lacs or more, otherwise than by way of an account payee
cheque or account payee bank draft or use of electronic clearing system through
a bank account: (a) in aggregate from a person in a day; (b) in respect of a
single transaction; or (c) in respect of transactions relating to one event or
occasion from a person. However, now after amendment, the limit of cash transaction
has been reduced from Rs. 3 lacs to Rs. 2 lacs.

Restriction on inter-charity corpus donations

Under
existing law, corpus donation by a charitable institution to another charitable
organization out of its income is treated as direct utilization of funds (by
the donor institution). At the same time, since corpus donation is not treated
as income in the books of the recipient institution there is no compulsion for
the recipient organization to utilize it. Ministry of Finance viewed this as
‘hoarding’ of funds among charitable organizations instead of applying the same
for charitable objects. Finance Act 2017 has now plugged this alleged
‘loophole’.

The
proviso inserted in section 10(23C) clarifies that any amount credited or paid
out of income of an institution referred to in sub-clause (iv), (v), (vi) or (via),
to any charitable trust or institution registered under section 12AA, being
voluntary contribution with specific direction that they shall form part of the
corpus of the institution, shall not be treated as application of income to its
objects.

A
corresponding change in section 11 has also been effected by insertion of
Explanation 2 at the end of sub-section (1) which similarly provides that
corpus donations through income referred to in clause (a) or (b) of sub-section
(1) shall not be treated as application of income for charitable or religious
purpose.

Additional conditions for applicability of Section
11 and 12

Registration
under section 12AA is an essential condition for an organization to avail tax
exemption on its income under sections 11 and 12. The Finance Act, 2017 has
amended sections 12A and 12AA to impose following additional conditions on organizations
registered under section 12AA :

To
make application to the Commissioner of Income Tax (CIT) within 30 days if
there is any change in the objects clause which do not conform to the
conditions of registration and have it registered.

Mandatory
filing of income tax returns within the time allowed under section
139(4A).

It
is obvious that a change in the object of the trust or institution which does
not conform to the original conditions of the registration would render the
registration untenable.

The
change with regard to mandatory filing of income tax return makes enjoyment of
tax exemption under section 11 and 12 conditional on timely filing of return.
It is a step towards increasing compliance under section 139(4A).

Restriction on cash donations

The
Finance Act has amended sub-section (5D) of section 80G to mandate that in
order to avail deduction under the section, donation for an amount larger than
two thousand rupees be made in modes other than cash (i.e. only by cheque or
electronic transfer). The amendment has further lowered the limit on cash
donations under section 80G to two thousand rupees only. The move is in
consonance with government’s overall efforts to push towards a cashless economy
and increase transparency in the system.

Expansion of power of survey

Amendment
of section 133A has now included the place of ‘activity for charitable purpose’
within the scope of Section 133A. This amendment expressly empowers the income
tax authority to enter any places of activity of charitable purpose for
inspecting books of accounts, verifying cash, stock or valuable articles or
furnishing any relevant information.

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Since its founding in 1986, the Centre for Advancement of Philanthropy (CAP) has helped philanthropic organisations comply with the complex web of legal issues governing charitable giving in India. CAP specializes in all legal matters concerning the Trusts/Societies Act, Income Tax Act, FCRA, Legal Aspects of CSR and a host of allied laws and good management & compliance practices.